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China's Holdings of U.S. Securities: Implications for the U.S. Economy

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Congressional rept.

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Given its relatively low savings rate, the U.S. economy depends heavily on foreign capital inflows from countries with high savings rates such as China to help promote growth and to fund the federal budget deficit. China has intervened heavily in currency markets to limit the yuans appreciation. As a result, China has become the worlds largest and fastest growing holder of foreign exchange reserves FER, which totaled 1.4 trillion as of September 2007. China has invested a large share of its FER in U.S. securities, which, as of June 2006, totaled 699 billion, making China the 2nd largest foreign holder of U.S. securities after Japan. These securities include Treasury debt, U.S. agency debt, U.S. corporate debt, and U.S. equities. U.S. Treasury securities are issued to finance the federal budget deficit. Of the public debt that is privately held, about half is held by foreigners. As of October 2007, Chinas Treasury securities holdings were 388 billion, accounting for 16.8 of total foreign ownership of U.S. Treasury securities and making China the second largest foreign holder of U.S. Treasuries after Japan. From March to October 2007, Chinas Treasury holdings declined by about 8. Some U.S. policy makers have expressed concern that China might try to use its large holdings of U.S. securities, including U.S. public debt, as leverage against U.S. policies it opposes. For example, various Chinese government officials are reported to have suggested that China could dump or threaten to dump a large share of its holdings to prevent the United States from implementing trade sanctions against Chinas currency policy. Other Chinese officials have reportedly stated that China should diversify its investments of its foreign exchange reserves away from dollar-denominated assets to those that offer higher rates of returns.

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  • Economics and Cost Analysis
  • Government and Political Science

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